To say that Apple’s App Store is thriving would be an understatement.  There have been 800 million downloads across Apple’s 30 million iPhones and iPod Touches — meaning on average each device has downloaded 27 apps.  The App Store now has over 25,000 apps and 250+ are added every day.

In such a crowded marketplace, how can an app possibly get noticed?

As developers know all too well, the key to being noticed is getting the app into the top-selling lists. Pinch Media’s data shows that “appearing on a top 100 list increases daily new users by an average of 2.3x” and appearing in the top 10 or top 25 list can mean an order of magnitude gain.

App developers have told me they’d do anything short of cutting their toes off to get into the top 10, top 50, whatever. That often includes lowering the price of their app.
-Dan Frommer, Silicon Alley Insider

So let’s say you have an app that’s selling for $1.99.  Sales are ok, but you want to make more money.  So you cut your price to 99c in an attempt to get on the best-selling list.  It’s perfectly logical after all:  the variable cost per unit is zero.  If you can increase sales 2.3x but earn half as much on each sale, you’ll come out a winner.

So obviously there’s a strong incentive for developers to cut their prices and concentrate on doing whatever it takes to get into that top 100 list.  And therein lies developers’ biggest complaint: the app store calculates popularity by unit downloads — without taking price into consideration. This structure has created immense competition and downward pricing pressure.  In February, the average top-50 app sold for $2.39 which is down 34% from $3.63 only two months prior.

Many have called on Apple to sort the list by total revenue rather than unit downloads. For example consider one purchase of a $10 app equivalent to ten purchases of a $1 app for ranking purposes.  This would highlight the apps creating the most value rather than the most downloads and it would help app developers sustain higher pricing.

But let’s talk about Apple’s dirty little secret: they want apps to be cheap.  The cheaper the apps, the more downloads — and the more value the user gets from the device.  This helps sell more devices, and although lower app prices does mean less app store revenue (Apple takes a 30% cut of app sales), that money is peanuts compared to Apple’s $425 profit/phone. In fact, Apple has said publicly that the app store is being run as a break-even service:

We’re thinking about the App Store in the same way that we think about the iTunes store. While it will generate some revenues, it will be a small profit generator, and just as with the iTunes store making iPods more attractive, we think the App Store will make the iPhone and iPod Touch more attractive to customers. We’ll hopefully see an indirect return by selling more iPhones and iPod Touches.
-Peter Oppenheimer, Apple’s CFO and SVP

The download pricing pressure caused by the per-unit ranking method is seriously hurting developers.  Is this a sustainable model?  No.  Developers will get fed up and leave eventually.  But right now it’s a one horse race: no other mobile platform has achieved much traction.  The most money for developers still lies in writing software for the iPhone.  And until Apple’s hand is forced by competition making significant inroads, a la Amazon forcing Apple to make iTunes DRM free, Apple won’t change a thing.  Everything is perfectly aligned in their favor.

One last point:  The upcoming iPhone 3.0 software supports a subscription pricing model for apps.  To be 100% clear, the new software will support in-app purchasing which asks the user to pay each month to continue using the application (rather than an automatic recurring subscription payment system like many people envisioned — the difference is subtle but important).  Some have reacted negatively to the subscription pricing announcement, fearing that apps will suddenly turn into crippleware and try to charge for every feature that was previously free.  This may be true at first, but ultimately it’s a free market and the problems will sort themselves out.  The simple truth is that the lack of a subscription pricing model was leaving money on the table.  It’s nice to see that being remedied.